In this day and age of social media dominance, it seems we absorb more headlines than actual numbers and facts. The daily flood of news has escalated the term “behavioral finance,” a theory that people’s biases and emotions influence and trigger their investment decisions, to new extremes. At the end of the day, many of the market gyrations and much of the market volatility can be avoided if investors take the time to evaluate a company before racing to sell when a “Breaking News” banner lights up the lock screen. Here are three of our tips for investing in the company and not the hot-and-cold headlines.
3 Tips for Investing in Companies and Not the News
- Unless you are at or near retirement, you are investing for the long term. If you invested $1,000 in Facebook on May 18, 2012, the day of its initial public offering (IPO), you would now have an investment worth just under $5,000 – a total return of nearly 400%! However, if you saw the headlines in June 2013 that highlighted the newly public company’s depressing -35% return since its IPO and jumped to sell, you would be kicking yourself when the 2014 headlines began boasting Facebook’s upcoming growth and potential that catapulted the stock onto the level we associate with it today. Now, let’s say you stayed calm and weathered those early storms but in June 2018 raced to sell in light of the data breaching news; you would again be kicking yourself when you saw the headlines this year flashing Facebook rebounding 25%. The moral of the story: Unless you have an immediate need for cash, stay invested!
- News sources always emphasize the negatives and downplay the positives. For example, let’s take a recent headline from MarketWatch on October 26: “Amazon earnings fall for first time in more than two years, stock drops in late trading” or CNBC’s more extreme version on October 24: “Amazon clobbered after a miss on the bottom line and soft guidance.” If you’re a shareholder, you may see these headlines and feel a sudden sense of panic, especially upon reading the word “clobbered” in reference to one of your investments. You may even rush to sell some of your shares in an attempt to hedge this apparently impending stock massacre. Now, let’s take a look at the actual numbers. The reality: Yes, on October 24, the stock did in fact drop about 9% after the company released its third quarter earnings that showed the company falling short of expectations with projected lower fourth quarter growth than previously predicted; however, the company’s revenue also grew 24% for the quarter, showing that Amazon’s heavy investment in free one-day shipping is proving worthwhile. A mere day later, the stock had already jumped back up 7%. All in all, Amazon is here to stay and occasional dips are normal at times – growing pains apply to companies too!
- “Breaking News” is fleeting. We see these notifications from news sources all too often (I just looked down at my phone for reference and have 59 “Breaking News” notification banners): CNBC Breaking News: “U.S. and China are close to finalizing some sections of trade deal, U.S. representatives say;” CNN Breaking News: “The trade war is destroying American profit;” MarketWatch Breaking News: “This unexpected trade-war outcome will send stocks soaring.” These three very conflicting headlines came within three days of each other – quite the roller coaster of financial emotions! The reality: News headlines flood our phone screens and inboxes excessively with the next new opinions and insights because that is the nature of those industries. Take every headline with a grain of salt, and don’t panic every time you see a “Breaking News” headline that could potentially impact your investments. The markets are weathered for these swings, and history has shown us that the markets always bounce back.
Final Points
Overall, remember the markets are not a one-way street. Companies will inevitably see fluctuations in their stocks on a regular basis, which is simply a reality of normal market behavior. The history of the market has shown us that investing pays off, and we need to remind ourselves to occasionally block out the short-lived noise and banter that this era of social media brings.
Questions and/or interested in how this applies to your financial life?
Email us here: info@afsfinancialgroup.com.
